8 July 2014

Samsung earnings hit by slowing China sales

Samsung Electronics Co. said operating profit declined to a two-year
low in the second quarter, hit by the strong local currency and slowing
demand for smartphones in China.

The result highlights how
dependent the company has become on smartphones for its earnings. Sales
growth in high-end Android devices has waned after several years of
rapid expansion. Growth remains robust in emerging markets where cheap
competitors have sprung up.

The South Korean electronics giant said Tuesday its operating income
was 7.2 trillion won ($7.1 billion) for the three months ended June 30,
down 24 percent from a year earlier. That was significantly below
analysts' expectations of about 8 trillion won. The company releases its
full quarterly financial results later in the month.

The figure
was the lowest since the second quarter of 2012 when Samsung's income
was 6.5 trillion won. Since then, Samsung's operating profit hasn't
fallen below 8 trillion won, largely driven by robust sales of Galaxy
smartphones.

Quarterly sales fell 10 percent from the previous year to 52 trillion won.

Samsung, which usually doesn't elaborate on its financial performance
until its full report later in the month, issued a rare statement to
explain its result, which Nomura analyst Chung Chang-won described as
"very disappointing."

The company blamed the lower profit on the
South Korean currency's appreciation against the U.S. dollar and the
euro, as well as most emerging market currencies. The won hit a 6-year
high against the U.S. dollar earlier this month.

It also said
sales of medium- and low-end smartphones were weak in China and in some
European countries because of stronger competition and sluggish demand.
Fewer consumers in China bought handsets that run on 3G mobile networks
as they waited for faster 4G networks.

Samsung, which earlier this
year vowed to aggressively expand its tablet sales, acknowledged it
faced some challenges in selling tablet computers. Consumers weren't
replacing their tablet PCs as often as smartphones, while smartphones
with a giant screen of 5 or 6 inches, such as Samsung's Galaxy Note
series, replaced demand for smaller tablets that measure about 7 or 8
inches.

"Expectations have been lowered on Samsung," said Will Cho, an
analyst at KDB Daewoo Securities. "With intensified competition in the
mid- and low-end smartphones, it will be tough to stay as lucrative as
in the past."

About three in every 10 smartphones sold globally
were made by Samsung in 2013 and the company's handset sales will likely
improve during the current quarter. But Cho said how much profit it can
take would be more important than how many handsets it can sell because
most sales growth would come from cheap smartphones.

In the cheap smartphone market, Samsung faces an uphill battle against brands such as Xiaomi and Lenovo.

Xiaomi,
an upstart Chinese company that is moving into other Asian countries,
surprised the industry with its $100-level smartphones that were snapped
up by fans. Counterpoint Technology Market Research said last month
that Xiaomi's $130 smartphone Redmi was the most-sold mobile device in
China in April, beating Apple's iPhone and Samsung's Galaxy.

Samsung shifted its focus to affordable smartphones, tablets and
wearable devices, such as the Gear smartwatches, to offset falling
profit but they are yet to arrest the declining earnings from
smartphones and components in mobile devices that Samsung supplies such
as memory chips and display screens.

Shares of Samsung traded 0.5 percent higher in Seoul as the company gave an outlook that appeared to reassure investors.

"The
company cautiously expects a more positive outlook in the third quarter
with the coming release of its new smartphone lineup," it said.
"Samsung expects stronger smartphone sales and this will have a positive
impact on the company's display panel businesses."

But some analysts were not convinced about Samsung's long-term prospects.

"Though
we anticipate some positive earnings impact for the component
businesses (in the third quarter), we see growing uncertainty over
Samsung's future earnings in the long-term," Chung, the Nomura Financial
Investment analyst, said in a commentary.

Chung cited Apple's
upcoming release of the iPhone 6, the increasing difficulty in standing
out from a plethora of other Android devices and the falling appeal of
premium smartphones, a reminder of the PC market that came to be flooded
with cheap almost identical products.

Samsung is expected to
announce an upgrade of the Galaxy Note series in the fall around the
time when Apple usually upgrades its iPhone.(AP)